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Nuts and Bolts of Homebuilders Pre-Earnings: 4 Picks

Shrabana Mukherjee

The housing market has been catching Wall Street's eye lately and investors are on the lookout for stocks poised to beat on earnings. Housing/homebuilding has been on a high in recent times on solid home sales data, affordable interest/mortgage rates and impressive housing starts figure. Resilient job growth and a healthy demand-supply balance along with seemingly high homebuilders’ confidence are adding to the momentum.

It goes without saying that President Trump continues to be the biggest factor in 2017. Investors are expecting faster growth based on Trump’s assurance of significant tax cuts, higher infrastructure spending and lesser regulations.

Although his recent defeat in a new health care legislation has slowed the momentum to quite an extent, as is evident from the latest homebuilder sentiment data, housing is likely to remain positive as we head into the spring. The National Association of Home Builders said its housing-market index slipped three points to 68 in April. The index reached 71 in March, its strongest since Jun 2005.

NAHB Chairman Granger MacDonald stated in a statement that "Even with this month's modest drop, builder confidence is on very firm ground, and builders are reporting strong interest among potential home buyers."

Notable Q1 Releases So Far

Despite concerns over the Fed’s interest rate hikes prospects, optimism surrounding the housing market remains largely unaffected, which is evident from the recently released earnings by notable homebuilders. KB Home’s KBH first-quarter fiscal 2017 earnings and sales surpassed analysts’ expectations by 7.1% and 2.1%, respectively. The company started 2017 on a positive note with an impressive 20.7% growth in revenues and double-digit rise in deliveries and housing revenues.

Last month, Lennar Corporation LEN came up with better-than-expected first-quarter fiscal 2017 earnings and sales on solid demand. Lennar’s CEO, Stewart Miller, said “our homebuilding operations have gone from slow and steady to a faster than expected sales pace throughout our first quarter,” thanks to a combination of economic optimism, wage and job growth, and increasing consumer confidence.

Housing/Homebuilding on Solid Ground

If we delve deeper into the statistics, homebuilding industry finds a place in the top 10% of the Zacks Industry Rank. A good industry rank supports growth. In fact, year-to-date, the Building-Residential/Commercial industry has widely outperformed the broader market (S&P 500), as you can see below:

This industry’s three-five year expected earnings per share (EPS) growth rate of 11.2% is better than the broader market’s 9.5% rate. Moreover, the industry boasts a solid Return on Equity (ROE) of 12.6%, comparing favorably with the construction sector’s ROE of 9.4%.

Again, the homebuilding industry’s projected earnings per share growth rate of 16.1% is higher than the sector’s 15.8% projection.

So, keeping the positive momentum in mind, we may zero in on some housing stocks that have gained in the current mixed scenario and have the potential to rise further before mortgage rates start rising.

Winning Stocks

With the help of the Zacks Stock Screener, we have handpicked four stocks in the homebuilding industry based on a good Zacks Rank and other relevant metrics.

Texas-based D.R. Horton, Inc. DHI is one of the leading national homebuilders. The company remains committed toward achieving continued double-digit annual growth in both revenues and pre-tax profits, while generating positive cash flow and improved returns.

D.R. Horton’s shares returned 24.9% so far this year, outperforming the broader industry. Estimates have moved north in the last seven days for the current as well as for the next year. The company is also expected to witness earnings growth of 16.1% for the current year. D.R. Horton has a solid 3–5 year EPS growth rate of 10.97%.

This bullish analysts’ sentiment justifies the stock’s current Zacks Rank #2 (Buy) and why we are expecting outperformance from the company in the near term.

PulteGroup Inc. PHM engages in homebuilding and financial services businesses primarily in the U.S.

Shares of PulteGroup returned 31.2% in the above-mentioned period, outperforming the industry. The company’s value-creation strategy, prudent land investments and strategic initiatives should drive growth in the upcoming quarters.

PulteGroup has a solid 3–5 year EPS growth rate of 14.01%. This earnings momentum will likely continue in the near term, as reflected by the company’s projected EPS growth of 31.5% for the current year (higher than the industry average of 16.1%) and 20.1% for the next year.

In the last 60 days, the Zacks Consensus Estimate for PulteGroup increased 0.9% for 2017 and 3.9% for 2018. The positive earnings estimate revisions indicate analysts’ confidence and substantiate the Zacks Rank #2 for the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Engaged in the construction, sale and related financing of residential housing, M.D.C. Holdings, Inc. MDC also carries a Zacks Rank #2 and boasts a solid VGM score of ‘A.’ In the last 60 days, the Zacks Consensus Estimate for current year’s earnings moved up 0.8%. M.D.C. Holdings has a projected EPS growth rate of 26.8% in 2017, higher than the industry average of 16.1%.

Shares of M.D.C. Holdings returned over 20% in the said period, almost in line with the industry’s gain. Its 3–5 year EPS growth rate is pegged at 10.67%.

Persimmon Plc PSMMY designs, develops and builds residential housing. The stock sports a Zacks Rank #1 and rallied 28% year-to-date, faring a lot better than the broader industry.

In the last 60 days, the Zacks Consensus Estimate for the company increased 3.8% for 2017 and 6.3% for 2018.

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